Published 2012.01.30 in CommPRO.biz

Too Big To Loan?

Earlier this month (2013.01.16) the president of the Dallas Federal Reserve Bank, Richard Fisher, delivered a speech worthy of a Texas straight shooter. It was followed up the next day by a 30+ page report supporting the need to deal with the danger a handful –about a dozen- Too Big To Fail (TBTF) banks present to our economy.

These are the same financial monsters whose reckless actions pulled the rug out from under the world economy and brought about the 2008 crash. The folks who put millions of people out of their homes, crippled small businesses and drove the unemployment numbers in America sky high. The same handful of reckless banksters, who rolled the dice, lost and left the rest of us with no alternative but to bail them out.

In an effort to avoid a repeat of this disaster the Congress passed the Dodd-Frank Act. In the end the TBTF banks’ lobbying efforts allowed them to stay focused on risky speculative (AKA gambling) deals, knowing full well that contrary to its intent, Dodd-Frank does nothing to protect against another taxpayer bailout. Mr. Fisher concedes there’s little chance that we can rein-in their reckless behavior in the short term. He does, however, offer an escape hatch to take the taxpayers off the hook to some degree.

If he had his druthers, Mr. Fisher would slice the monster banks into separate entities, none large enough to destabilize our economy. He would peel away all of their financial activities that fall outside the banks’ traditional role. While that remains the long-range goal laid out in the Dallas Fed’s report, their short-term goal seems to correct much of the problem.

Mr. Fisher points out that the insurance protection created in 1933 –The Federal Deposit Insurance Corporation (FDIC)– was intended to cover our hometown and regional banks. The 98.8% we ordinary folk are used to dealing with, not the 12 monster banks, the 0.2% who hog nearly 70% of all banking assets. Assets we furnish them with to make small business loans and create jobs. But that’s not what the use it for. Instead they use the free money we furnish to make wild bets, secure in the knowledge that if they lose, we pay.

Restricting FDIC protection to its intended role would roadblock moves like the one Bank of America made the first of this month (January 2013). They moved derivative contracts worth $15 trillion from their broker-dealer division to their insured depository institution. Guess who’s on the hook if those puppies go bad?

It’s past time that the low interest cash we provide the banks goes to the 98.8%, the regional and Community Banks who will provide small business loans. If the monster banks -the 0.2%- want to gamble, let them do it with their investors’ cash. And make sure those investors know that their funds will not insured by America’s taxpayers.

Rolling the Dice, Again

Let’s suppose a bunch of organized crime types –unbeknownst to you– put together a scheme to offer odds on whether or not you will pay your mortgage on time each month for the next year. And even though your mortgage is only a few hundred bucks a month, they found high rollers willing to put big money, hundreds of millions, on one side or the other of these bets.

While that’s a little oversimplified, that’s pretty much what happened leading up to the 2008 financial crash when the big banks had folks betting for and against packages of home mortgages. Of course organized crime types would be in big trouble if they did something like that; gambling laws in almost every state make that kind of activity a big no-no. Those laws, however, do not apply to banks, and others engaged in what can laughably be called investing. During recent decades the Federal Government adopted laws exempting this form of gambling.

You would think that after what happened so recently we would have changed those laws. You would be wrong. In fact the lobbyists have managed to block even modest reform. Dodd/Frank would have made some important changes, but it has been hamstrung by opponents who simply cut off funding to implement the reforms.  

And the gamblers have turned to the commodity market. Summer, normally a quiet time, has seen an all-time record trading month in July and it looks like August will surpass it. All the exchanges from commodities to stocks are racking up billions of trades every day; some are showing trading increases in the billion range doubling normal volume. From the high-frequency traders who are little more than pirates roaming the capital markets to panicky investors afraid to be skinned by the gamblers, the markets are crazy.  

It’s time to set some parameters that will bring the markets back to their purpose, to create capital to support our economy. Banks need to get back to banking and off the trading floor. The exchanges need to focus on their purpose, to serve as a marketplace for capital and business to meet and create growth in our economy. At this point they are too interested in the revenue created by billions of trades and not interested enough in the future of this nation.

We need to reward investors, those who buy and hold stocks. Those in the market for the long haul. They’re the ones who should get the tax breaks. Let’s make capital gains taxes gradually go away the longer you hold an investment. Let’s make the gains reaped by those who buy and sell stocks in a matter of days or hours or a few seconds subject to punishing taxes. This kind of “playing” the market generates no public benefit.

And let’s call those who bet for and against almost anything what they are, gamblers. Let’s take away their “Get out of jail free cards.” Let them suffer the same legal consequences as those running an illegal card game in their basement. It’s the right thing to do.